Ancestry.com: The Future of History

I was lucky enough to get to know the people who run Ancestry.com (NASDAQ:ACOM) in my prior career as a media analyst and banker, and they are top notch. In addition, they run a business that faces little competition, is highly profitable, has a recurring revenue model and benefits from network effects as it grows larger.

After a successful but not “hot” IPO last fall the company has handily exceeded initial investor expectations in 4Q09 and 1Q10, the sign of a professionally run and conservative management team. The stock has responded but analyst estimates still appear conservative, and I think there is plenty of upside left especially after this market pullback. I have owned the shares since just after the IPO and have bought more recently. I think the shares can trade to $23 and still be an attractive longer term holding after that.

Baby Boomer Play. For those who don’t know, Ancestry.com is a robust online resource for pursuing one’s family history and genealogy. The company is the clear leader in this category which should have increasing appeal as baby boomers age and have more leisure time to record their legacy. Over the past 13 years the company has digitized and indexed family history data from a slew of sources worldwide and now claims 4 billion records.

According to Nielsen, 44mn homes are baby boom homes (39% of US households) representing 77mn people. This is clearly a big market opportunity (and not limited to just baby boomers or to the U.S. either as the service is internationally available). Consumers can subscribe to different levels of Ancestry.com’s service including many free, introductory resources. As of March 31, 2010 the company had 1.2mn paid subscribers who pay an average of about $17 per month.

Compete.com reports more than 6.7mn unique visitors to the Ancestry.com in March, well above the 1.7mn for OpenTable.com and more than one third of Netflix’s 19.8mn in traffic. Ancestry’s customers appear happy with the service with monthly churn of only 3.3% in the past quarter (an improvement from 3.8% in 2009).

Estimates Still Appear Prudently Conservative. My financial model suggests the company can meet or exceed its 2010 guidance of $275mn-$280mn in revenue and $90mn to $95mn in EBITDA even if new subscriber growth slows to about 10% in the second half of the year (following 48% y/y growth in 1Q10) and 2H10 churn increases from 3.3% to 3.7%.

Of course 1Q10 benefitted from the airing of complementary television show Who Do You Think You Are? on NBC which was great exposure for the Ancestry.com brand and service. While subscriber growth should moderate some when the show is not on, at its upfront meeting with advertisers this past week, NBC announced the return of WDYTYA for next television season, so we have that to look forward to.

Even with conservative assumptions in the second half of 2010 and for 2011 my estimates for revenues are in line or higher than analyst estimates (as posted on Yahoo! Finance) of $279mn in revenue and $0.63 in EPS for 2010 and $317mn in revenue and $0.82 in EPS.

My numbers for 2010 are $279mn in revenue and $0.65 based on $90.7mn in EBITDA (I actually look at EBITDA after stock comp expense so my EBITDA estimate is $86.7mn after about $4mn in 2009 stock comp). My 2011 estimates are $319mn in revenue, $102mn in EBITDA ($108mn adding back stock comp) and $0.84 in EPS. The company enjoys strong free cash flow characteristics, so I expect free cash flow per share of $1.00 in 2010 and $1.15 in 2011. Net-net I expect the company to meet or exceed estimates going forward into 2011 which is usually a key ingredient for stock price outperformance.

Long ACOM. Especially after last week's stock market downdraft the shares, which closed at $16.80, look attractively valued (and not particularly vulnerable to the crashing Euro and economic slowing, but of course not immune) at only 7.5x my 2011 EBITDA estimate and only 15x 2011 free cash flow.

I have been adding to my position recently and have a one year target price of $23 which would be 10x EBITDA and 20x free cash flow and 27x EPS. Although nothing is really comparable to Ancestry.com, other online subscription companies, Netflix and OpenTable, trade at 2011 P/Es of 28x and 52x, respectively.

Disclosure: Author holds a long position in ACOM and may buy more within the next 3 days at or around current level of $16.80